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Careful With Those Gift Cards!

Look those gift cards in the mouth -- some are missing a few teeth.

They seem like such a good idea, gift cards. Instead of taking a chance and getting Tiffany that automatic hair beader and Floyd that ice bucket -- gifts they may or may not like -- you can simply present them with gift cards. Essentially gift certificates in plastic card form, gift cards have become big business.

According to the National Retail Federation, three-quarters of us (shoppers) will buy at least one gift card this year. We'll spend a total of about $17 billion, roughly $108 per person. The TowerGroup consultancy thinks those numbers are low, estimating that we spent fully $45 billion on gift cards last year. Regardless, you get the picture -- big bucks.

Gift cards have many attractions. They are easy to buy and easy to give, and they let the recipients choose their preferred gifts. But they have a dark side, too. Gift cards from banks, for example, often cost money to buy -- sometimes 10% of the value of the card, or even more. It will cost you $5.95 extra, for example, to buy a $100 gift card from Bank of America. Ouch.

Many other gift cards will surprise you (or the recipient), because they:

have an expiration date, or

lose value over time

That's right -- while dollar bills you give today remain dollar bills years from now (though thanks to inflation they may not buy as much), gift cards are frequently only good for a specified period of time. Some cards even reduce their value as the months tick by. Shocking!

Fortunately, there are easy fixes for these problems. If you're a buyer of gift cards, read the fine print, and learn how the card works before you buy it. If it expires or should be used soon, warn the recipient (or skip it and buy another card). If you're a recipient of a gift card, look up its details to see how long it's valid. Perhaps most importantly, do use it! Otherwise, that money is gone.

Well, actually, it's not gone. It's merrily pocketed by the issuing company. That's right -- what has become a growing convenience for many consumers has become a growing bonanza for retailers and banks. That's because roughly 10% of all gift cards are never redeemed. If a company sells $100 million worth of gift cards (and some companies do), it may end up keeping $10 million as pure profit. The profit margin? Awfully close to 100%. This is good news for many investors.

Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian